Corporate tax in Afghanistan

At a glance

Corporate Income Tax Rate (%) 20
Capital Gains Tax Rate (%) 20
Business Receipts Tax Rate (%) 4 / 5 / 10 (a)
Withholding Tax (%) (b)
Dividends 20 (b)
Interest 20 (b)
Royalties from Patents, Know-how, etc. 20 (b)
Commissions 20 (b)
Net Operating Losses (Years)
Carryback 0
Carryforward 3 (c)

a) This tax is imposed on total gross revenue before deductions. It is a deduct­ible expense in computing taxable income.

b) This withholding tax is considered a final settlement of the tax liability.

c) Losses can be generally carried forward in equal proportions to each of the following three years. Unrestricted loss carryforwards are allowed for speci­fied companies.

Taxes on corporate income and gains

Corporate income tax. Companies that are resident in Afghanistan are subject to tax on their worldwide income. Tax is levied on the total amount of income earned during the tax period.

Tax rates. The corporate income tax rate is 20%.

Certain types of income are subject to final withholding taxes. For information regarding these taxes, see Withholding taxes.

Business receipts tax. Business receipts tax (BRT) is imposed at various rates on total gross revenue before deductions. BRT is a deductible expense in computing taxable income for the same tax year. As a result of an endorsement of the president’s office, the former BRT rate of 2% was increased to 4%, effective from 17 August 2015. Consequently, BRT is now imposed at rates of 4%, 5% or 10% of the gross receipts, depending on the nature of the business and/or category of the receipt.

In addition, importers of goods are subject to BRT at a rate of 4% at the time of import. The Customs Office collects the BRT. This tax is treated as an advance payment against the BRT paid by the importer based on its receipts from the sale of goods.

The BRT return must be filed and BRT must be paid on a quar­terly basis within 15 days after the end of the quarter.

BRT does not apply to the following categories of income:

  • Interest income
  • Fees earned from banking transactions
  • Proceeds of futures contracts whether settled in cash or other­wise
  • Insurance or reinsurance premiums
  • Distributions received by shareholders with respect to their inter­ests in the company
  • Exports of goods and services
  • Salaries, dividends, royalties and other payments that are sub­ject to withholding tax
  • Income received from the rent or lease of residential property to a natural person if the tenant uses the property for residential purposes for more than six months of the tax year
  • Income of persons not having a business license that are taxed at fixed rates (see Fixed tax scheme)

Fixed tax scheme. For certain categories of income and persons, the Afghanistan Income Tax Law (AITL) provides for a fixed tax scheme under which taxpayers are required to pay a fixed tax dur­ing the year instead of income tax and BRT. The fixed tax applies to income received by importers and contractors that do not hold a business license in Afghanistan for the supply of goods and services, transporters, entertainers and natural persons deriving business income below certain limits. The amount of the tax var­ies, depending on the category of income and the person deriving the income.

Tax incentives. Some of the significant tax incentives available in Afghanistan are described in the following paragraphs.

Income derived from the operation of aircraft under the flag of a foreign country and income derived by the aircraft’s staff is ex­empt from tax if the foreign country grants a similar exemption to aircraft under the flag of Afghanistan and the aircraft’s staff.

Organizations that are established under the laws of Afghanistan and operate exclusively for educational, cultural, literary, scien­tific or charitable purposes are exempt from income tax.

Income derived from agricultural or livestock production is not subject to income tax.

Scholarships, fellowships and grants for professional and techni­cal training are exempt from income tax.

The above incentives are subject to a private ruling obtained from the Ministry of Finance (MoF) of the Government of Afghanistan.

Capital gains. Gains arising from the sale, exchange or transfer of capital assets, including depreciable assets, shares of stock and trades or businesses, are included in taxable income. However, gains derived from the sale or transfer of movable or immovable property acquired by inheritance are not included in taxable income.

Legal persons transferring movable or immovable property must pay a 1% tax on the amount received or receivable with respect to the transfer of ownership of such property. The tax paid may be used as a credit against tax payable when the tax return is filed.

Losses incurred on the sale or exchange of capital assets used in a trade or business are deductible from the taxable income in the tax year of the sale or exchange if the gain from such sale or exchange would have been taxable.

Losses incurred on the sale or exchange of shares of stock may be offset only against gains from the sale or exchange of shares of stock in the same year. If the gains exceed the losses from such transactions, the excess is taxable. However, if the losses exceed the gains, the excess is not deductible.

Administration

Filing requirements. Afghanistan follows the solar year as its tax year (that is, 21 December through the following 20 December). If a legal person wishes to use a 12-month period other than the solar period as its tax year, it may apply to the MoF in writing and pro vide the reasons for the change. The MoF may grant such application if it is justifiable.

The income tax return, together with the balance sheet, must be filed within three months following the end of the tax year (that is, by 20 March).

Withholding taxes. Withholding tax is an interim tax payment that may or may not be the final tax liability. Amounts withheld that are not final taxes are credited against the eventual tax liabil­ity of the taxpayer for the relevant year.

The following are the rates of significant withholding taxes under the Afghanistan income tax law.

Type of payment Rate (%)
Rent for immovable property used for commercial, industrial and other economic purposes 10 / 15 (a)
Salaries and wages 2 / 10 / 20 (b)
Payments for imports by importers that have a business license 4 (c)
Payments to persons that have a business license for the providing of goods, material, construction and services under contracts to government agencies, municipalities, state entities, private entities and other persons 2
Dividends 20 (d)
Interest 20 (d)
Royalties 20 (d)
Prizes 20 (b)
Rewards 20 (d)

a) The rate depends on the monthly rent.

b) The rate depends on the monthly salary.

c) The tax is calculated based on the cost of the imported goods including customs duty and is collected by the customs office where the customs duty is paid. Half of the tax (that is, 4% of the value of imports) may be offset against the BRT payable by the importer while the balance is treated as a tax credit against the tax liability for the year. See the discussion of the BRT in Section B.

d) This is a final withholding tax.

Interest and penalties. A legal person that fails to file a tax return by the due date without reasonable cause may be subjected to additional income tax of AFN500 per day.

In addition, if a person fails to pay the tax by the due date, penal­ties amounting to 0.1% of the tax per day may be imposed. If no tax is paid, an additional tax of 10% may be imposed in addition to the 0.1% penalty.

A person that is determined to have evaded income tax may be required to pay the income tax due and the following additional tax:

  • In the first instance, additional tax of double the evaded tax
  • In the second instance, additional tax of double the evaded tax and termination of the person’s business activity by order of the court

A person that fails to withhold tax from payments without rea­sonable cause may also be subject to additional tax of 10%.

Dividends. A company paying a dividend must withhold tax at a rate of 20% of the gross amount. Dividends are regarded as Afghan-source if they are received from resident companies operating in Afghanistan.

If a branch in Afghanistan of a nonresident person pays or incurs an amount to the head office or any person connected to the non­resident person, that amount is also treated as a dividend.

Dividends paid in cash, from which tax has been deducted at source, are allowed as deductions for the payers of the dividends. However, such deductions are not allowed to branch offices in Afghanistan making payments of dividends to their head offices and other affiliates.

Dividends paid in the form of securities for shares or loans of a similar nature are not deductible from the income of corporations or limited liability companies.

Foreign tax credit. If a resident person derives income from more than one foreign country, proportionate foreign tax credit is allow­ed against income from each country.

Determination of taxable income

General. The determination of taxable income is generally based on the company’s financial statements, subject to certain adjust­ments.

Business expenses incurred during a tax year or in one of the preceding three tax years are deductible for purposes of calculat­ing taxable income.

Inventories. Inventory for a tax year is valued at the lower of cost or market value of the inventory on hand at the end of the year. All taxpayers engaged in manufacturing, trading or other busi­nesses must value inventories in accordance with the method prescribed by the MoF.

Tax depreciation. Depreciation of movable and immovable prop­erty (except agricultural land) used in a trade or business or held for the production of income is allowed as an expense. The total depreciation deductions for property may not exceed the cost of the property to the taxpayer.

A person is not entitled to claim depreciation for that part of the cost of an asset that corresponds to a payment for which the per­son failed to withhold tax.

Enterprises registered under the Law on Domestic and Foreign Private Investment in Afghanistan are entitled to a deduction for the depreciation of buildings and other depreciable assets over the following time periods:

  • Buildings: four years
  • Other depreciable assets: two years

Depreciation is calculated using the straight-line method, in equal proportions. However, if a depreciable asset is held by the enter­prise for less than half of the year, depreciation is calculated and deducted for half of the year. If a depreciable asset is held for more than half of the year, depreciation is calculated and allowed for one year.

Net operating losses incurred by a taxpayer on account of depre­ciation may be carried forward by the enterprise until such loss is fully offset. However, to claim such offset, the enterprise must be an approved enterprise under the AITL.

Depreciation and expenditure that relate to a period covered by a tax exemption or to a period before an enterprise becomes an approved enterprise for the first time may not be included in the calculation of a net operating loss.

Relief for losses. A corporation or limited liability company that incurs a net operating loss in a tax year may deduct the loss from its taxable income of the following three years in equal propor­tions.

Net operating losses incurred by approved enterprises as a result of depreciation may be carried forward until they are fully offset.

Other significant taxes

Afghanistan does not impose value-added tax or goods and ser­vices tax. Customs duties apply to the import of goods.

Miscellaneous matters

Foreign-exchange controls. In general, remittances in foreign cur­rency are regulated and are required to be converted to afghanis (AFN) at the established rate of the Da Afghanistan Bank. In certain cases in which the Da Afghanistan Bank does not trade for a particular currency, the currency is first converted into US dol­lars and then into afghanis.

Anti-avoidance rules. All transactions between connected persons are expected to be carried out at an arm’s length. If transactions are not conducted on an arm’s-length basis, the tax authorities may determine the arm’s-length standard under prescribed meth­odologies. These methods are similar to the methods as available under the commentary to the Organisation for Economic Co-oper ation and Development (OECD) model convention.

If a person enters into any transaction or arrangement with the intent to cause reduction of liability to pay tax, the MoF may disregard such transaction or arrangement and assess all persons affected by the transaction or arrangement as if the disregarded transaction or arrangement had not taken place.

US and North Atlantic Treaty Organization agreements

A bilateral agreement between Afghanistan and the United States exists in the form of Diplomatic Notes exchanged between the countries. Under the Diplomatic Notes, tax exemption is provided to the US government and its military, contractors and personnel engaged in activities with respect to the cooperative efforts in response to terrorism, humanitarian and civic assistance, military training and exercises, and other activities that the US govern­ment and its military may undertake in Afghanistan.

Military and technical agreements have also been entered into with International Security Assistance Forces, which allow similar exemptions.

On 30 September 2014, Afghanistan signed a Bilateral Security Agreement with the government of the United States and a Status of Force Agreement for North Atlantic Treaty Organization (NATO) forces. These agreements, which enter into force on 1 January 2015, replace all previous agreements applicable until 31 December 2014 and amend the previously offered exemptions for NATO foreign and local contractors and subcontractors.

Exemptions available under these agreements are subject to pri­vate rulings obtained from the MoF. In addition, the agreements generally do not provide exemptions from the obligation to with­hold tax from all payments to employees, vendors, suppliers, ser­vice providers, lessors of premises and other persons, as required under the local tax laws.